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Should it raise alarm bells if Circle is raising further capital on the stock market to ease a shortfall in its net working capital?
Circle aims to have 30 hospitals in the UK health care sector within the next five years. Its policy therefore can be described as one based on a growth strategy. Some initial reverses in many start ups are always possible and an allusion has been made to the birth pangs of Facebook and BSkyB. The Alternative Investment Market (AIM) where Circle Holding is listed reacted expectedly and the stock price fell. Equity investors consider funding running costs a risky move suggesting decreased future returns. Circle Holding accounts for 50.01% of Circle’s stock. The rest i.e. 49.99% is shared by Circle Partnership, which is not traded in any market and therefore has no current valuation. It is Circle Holdings whose financial health as reflected in its earnings per share is important to markets. It must be remembered that markets were not gracious to Enron which too had a high growth strategy (more and more acquisitions). In the end, Enron’s inability to maintain sufficient net working capital proved to be its undoing because the market had gauged its underlying weakness.
Circle’s major equity investors include some major Hedge Funds, which traditionally invest for between 3-5 years and certainly not for the long term. Amongst other things one of the things that Hedge Funds do is diversification of investments to minimize diversifiable risk. In an efficient investment portfolio, UK health care sector (with a negative beta) would be a good investment considering current market volatility. Risk could be mitigated by diversifying with other industries like entertainment and travel, which could face a downturn.Short term investment, however does not bode well for health care and so Circle’s business model is yet untested.
Circle originally advertised itself as a social partnership model. If it became a true John Lewis partnership with real employee ownership, there would be hope. This would require some objective valuation of Circle Partnership stock for employees to get a real sense of ownership. Employees would then be motivated to work above contractual obligations to get substantial productivity gains. Moreover, as opposed to Hedge Funds, employees would be more likely to invest for the longer term. At present, that sense of ownership is missing and markets can sense this. Circle may succeed if it sincerely implements a social enterprise model and offers tangible ownership to health care employees. Hinchingbrooke Hospital with a revenue of £100 million per annum dwarfs other Circle project revenues and therefore what happens at the hospital will be very interesting for many public and private stakeholders.
Competing interests:
Dr Rizwan Hasan is the Chairman of the Medical Advisory Committee of Hinchingbrooke Hospital
Re: Private company that took over failing NHS hospital seeks £47.5m to prevent insolvency
Should it raise alarm bells if Circle is raising further capital on the stock market to ease a shortfall in its net working capital?
Circle aims to have 30 hospitals in the UK health care sector within the next five years. Its policy therefore can be described as one based on a growth strategy. Some initial reverses in many start ups are always possible and an allusion has been made to the birth pangs of Facebook and BSkyB. The Alternative Investment Market (AIM) where Circle Holding is listed reacted expectedly and the stock price fell. Equity investors consider funding running costs a risky move suggesting decreased future returns. Circle Holding accounts for 50.01% of Circle’s stock. The rest i.e. 49.99% is shared by Circle Partnership, which is not traded in any market and therefore has no current valuation. It is Circle Holdings whose financial health as reflected in its earnings per share is important to markets. It must be remembered that markets were not gracious to Enron which too had a high growth strategy (more and more acquisitions). In the end, Enron’s inability to maintain sufficient net working capital proved to be its undoing because the market had gauged its underlying weakness.
Circle’s major equity investors include some major Hedge Funds, which traditionally invest for between 3-5 years and certainly not for the long term. Amongst other things one of the things that Hedge Funds do is diversification of investments to minimize diversifiable risk. In an efficient investment portfolio, UK health care sector (with a negative beta) would be a good investment considering current market volatility. Risk could be mitigated by diversifying with other industries like entertainment and travel, which could face a downturn.Short term investment, however does not bode well for health care and so Circle’s business model is yet untested.
Circle originally advertised itself as a social partnership model. If it became a true John Lewis partnership with real employee ownership, there would be hope. This would require some objective valuation of Circle Partnership stock for employees to get a real sense of ownership. Employees would then be motivated to work above contractual obligations to get substantial productivity gains. Moreover, as opposed to Hedge Funds, employees would be more likely to invest for the longer term. At present, that sense of ownership is missing and markets can sense this. Circle may succeed if it sincerely implements a social enterprise model and offers tangible ownership to health care employees. Hinchingbrooke Hospital with a revenue of £100 million per annum dwarfs other Circle project revenues and therefore what happens at the hospital will be very interesting for many public and private stakeholders.
Competing interests: Dr Rizwan Hasan is the Chairman of the Medical Advisory Committee of Hinchingbrooke Hospital