38 Monday May 23 2022 | the times
Business
Britain misses out on £143 billion in lost
economic output a year because of the
unwillingness of investors to spend on
critical areas of the modern economy
such as software, research and patents.
A study, co-authored by Jonathan
Haskel, the Bank of England rate-set-
ter, and Stian Westlake, of the Royal
Statistical Society, found that the UK’s
inability to invest equivalent amounts
to those of the United States in the “in-
tangible economy” from 2007 to 2019
had resulted in the loss of £2,144 per
household, or 0.5 percentage points of
GDP a year.
The research shines a light on
chronically weak capital investment in
Britain, where business spending is
Investors refuse to put cash in ‘intangible economy’
Mehreen Khan Economics Editor stuck at more than a third lower than
pre-Brexit trends, according to the
Office for National Statistics.
The findings, which will be published
tomorrow, focus on the investment gap
for intangible assets that generate long-
term value for companies, such as licen-
ces, intellectual property and software,
rather than traditional physical assets,
such as machinery and equipment.
This could be attributed to investors’
“aversion” to capital spending in these
areas, the authors said. “The UK is
missing out on economic growth due to
a collective failure to invest in intangi-
ble capital over the past 15 years. This
loss has also hit many UK retail inves-
tors and pensioners. Funds that fa-
voured low-intangible stocks returned
2.7 times less to customers than the
smaller number of funds in intangible
capital-intensive businesses.”
British underinvestment contrasts
with America, home to the world’s larg-
est technology groups, where capital
investment has averaged 4.4 per cent
per year since 2000. The UK’s intangi-
ble spending fell from a high of 3.2 per
cent in 2007 to 2.3 per cent over the last
15 years, the report’s authors said.
“Tech companies in the US have seen
enormous global growth... As society
becomes richer, most business invest-
ment goes into things you can’t touch,
like research and organisational devel-
opment, branding, and software.
“Slower economic growth doesn’t
just lead to consumers having less
money, it contributes to a lower like-
lihood of pay rises, reduced cash in pen-sion pots, diminished investment for
public services and less scope to tackle
long-term challenges, such as climate
change and investing in infrastructure.”
Business investment fell by 0.5 per
cent at the start of the year despite the
government’s introduction of a super-
deduction tax break to stimulate capital
spending and boost productivity.
Higher interest rates, rising energy
costs and uncertainty caused by the
war in Ukraine risk dampening invest-
ment further. The authors recommend
policy incentives to plug the invest-
ment gap. “The government needs to
enable greater access to risk capital...
ensuring... equity investment in all
kinds of companies, including startups,
through financial regulation and the
taxation system,” they said.6 The government should
encourage investment in clean
technologies, such as tidal power
and carbon capture, to boost lagging
productivity in some of the worst-
performing regions, a study says
(Mehreen Khan writes). The London
School of Economics and the
Resolution Foundation say the
government’s commitment to hit net
zero by 2050 could boost areas such
as Tees Valley, Durham, Derbyshire
and Nottinghamshire, which have
the highest share of green patents.
Hitting the emissions target will
require green investment of upwards
of £50 billion by 2030, up from the
present £13.5 billion, according to
the Climate Change Committee.Sale and leaseback deal lands
Priory with soaring rent bills
Regulator fee
rise ‘threatens
small firms’
James HurleyThe City regulator has been urged to
rethink a plan to increase fees for
financial firms, with a warning that it
threatens the viability of the smallest
operators and risks reducing consumer
choice.
The Financial Conduct Authority is
introducing a new fee structure for the
“A” and consumer credit fee-blocks,
which includes small firms paying the
minimum cost of being regulated. It is
set to push ahead with an increase to
minimum fees from £1,151 to £2,200, al-
beit with a concession that the changes
will be phased in over three years.
Martin McTague, national chairman
of the Federation of Small Businesses,
said it was “really hard to see any justifi-
cation” for the rise, “especially when the
great majority of responses to its con-
sultation disagreed with raising fees.
For large finance companies, any
increase will be a drop in the bucket, but
tens of thousands of small businesses
and self-employed people who will be
hit by the rises will find them much
harder to swallow.”
Peter Robinson, of Kazlin Com-
mercial Finance in Devon, a one-man
credit broker for small businesses, said:
“That is not viable for most small
brokers. The world seems to want
bigger firms, so SMEs are being hit.” He
said he would probably give up auth-
orisation and would move into areas
that did not require it. He feared that if
other brokers did the same it would
reduce choice for borrowers because
“unregulated brokers won’t be able to
get the best deals for their clients”.
The FCA said the proposals had been
finalised in March so the changes
would go ahead. It has decided that fees
should rise to reflect the value it
believes there is in being authorised
and to reflect the damage small firms
can sometimes do to consumers, in
investment scandals for example.
McTague said the increase “threat-
ens to put some smaller firms out of
business entirely, reducing the diversity
of finance provision to businesses and
consumers alike, which cannot be what
the FCA wants or intends to happen”.
A spokeswoman for the regulator
said: “Approval to run a financial
services firm brings with it a value and
we firmly believe that firms should pay
a fee that reflects the cost associated
with being regulated. We acknowledge
that firms are operating in a difficult
financial environment and we have
already agreed to phase in the fee
increase over a period of three years.”Alex Ralph
Britain’s biggest mental healthcare
chain is facing spiralling rental bills
after its new private equity owner
agreed an £800 million sale and lease-
back deal shortly before inflation took
off.
The Priory Group was sold by Acadia
Healthcare, a US-listed mental health-
care provider, to Waterland, a Dutch
private equity firm, in January last year
for almost £1.1 billion. Its standard of
care has come under the spotlight after
a recent investigation in The Times.
The deal was largely financed via
the sale and leaseback of 35 freehold
Priory healthcare facilities to Medical
Properties Trust, an American inves-
tor, which was completed in June. The
rents are subject to annual inflation-
based escalators, a filing to America’s
Securities and Exchange Commission
shows, meaning that the Priory faces
increasing rental costs. Inflation rose to
a 40-year high in April of 9 per cent,
official figures showed last week.
The Times reported last month that
NHS bosses had criticised the group for
failing to keep patients safe and the
newspaper’s investigation revealed that
the Priory had been criticised for
failings in the care of 30 patients who
had died.
The Priory has been associated with
running rehabilitation centres popular
with celebrities, but it earns 90 per cent
of its revenues from contracts with the
NHS and local authorities.
Nick Hood, a healthcare specialist at
Opus Business Advisory Group, said
that a “sharp rise in rent costs triggered
by the UK’s inflation crisis is the very
last thing the Priory needs as it tries to
claw its way back into profit and
straighten out its battered balance
sheet”. He estimated that it could add
an extra £4 million on to the Priory’s
operating costs.
Sale and leaseback deals separate the
ownership of assets from their opera-
tional management and came under
scrutiny after the collapse in 2011 of
Southern Cross, a care homes provider
that struggled with rising rents.
The Priory’s latest set of publicly
available UK accounts show an annual
cash rent bill of £43.3 million as part of
the deal, “subject to annual review”.
The leases carry an initial fixed term
of 25 years, two ten-year extension op-
tions and annual rent escalators linked
with UK inflation and subject to a 2 per
cent floor. The sale and leaseback is ex-
pected to provide MPT with a yield of
8.6 per cent.
Waterland has been integrating the
Priory with Median, its German re-
habilitation chain that also has a sale
and leaseback agreement with MPT.
The lease on the Priory property deal
is understood to have an inflationary
cap, but its level or the rate of inflation
rents are linked to are not known.
A Priory spokesman said: “Investors
are confident in the integrated Median-
Priory Group capital structure. The
group recently completed a debt
funding round where it was able to raise
finance on appropriate market terms.
“The sale and leaseback will not
impact on its ability to make significant
investments, such as in electronic
records across all our care homes and
‘supported living’ services, in Priory
facilities and in Priory’s workforce, at a
time when other providers are strug-
gling to fund operational improve-ments.” As part of the Priory sale, MPT
also provided a £250 million bridging
loan and acquired a 9.9 per cent stake.
Acadia, which bought the Priory for
£1.3 billion in 2016, sold it to reduce its
debts and was advised by Rothschild,
the investment bank. The sale process
was interrupted by the pandemic, with
patient referrals, particularly for
shorter stays, disrupted by lockdowns.
The Priory’s 2020 accounts, the latest
publicly available, show a pre-tax loss of
£297.4 million, in part due to the impair-
ment of some facilities, and debt of
£1.2 billion owed to Acadia.
Rosena Allin-Khan, Labour’s
shadow minister for mental health, said
the financial state of the Priory’s
accounts raised “questions about the
knock-on impact on their ability to
provide suitable care to their patients”.
The spokesman for the Priory said it
had “a consistently strong quality track
record, with more than 85 per cent ofour sites currently rated good or better,
and the measures we are taking will
improve quality still further. We have
invested £122 million in improving our
facilities in the last three years and we
are currently reconfiguring a number
of services to meet commissioner de-
mand. We remain committed to invest-
ing in our workforce with enhanced
benefits and training programmes. This
will improve patient outcomes.”
The Priory had said in response to
The Times’s report last month that it
had cared for more than 270,000 out-
patients and inpatients over the past
decade and had “a strong safety record”
despite the increasing complexity of
patients’ needs. It said it had prevented
far more deaths through treatment
compared with the 30 cases in which a
patient had died and criticisms had
been made of the quality of its care.
Waterland did not respond to a
request for comment.The Priory, which operates centres including in Roehampton, earns most of its money from the NHS and local councilsALAMY