Children’s care triggers bumper returns for private equity owners
Children’s care providers have drawn scrutiny for providing bumper returns to private equity investors even though many local authorities are struggling to provide adequate care.
Fee income and pre-tax profits have grown across the largely private equity-owned sector, as councils are legally obliged to find care for children that need it and demand has grown during the pandemic.
Profit margins on children’s care providers including fostering, homes, and residential special schools have increased from 16.3 per cent to 17.6 per cent over the past year, according to a study of the top 20 companies in the sector by Revolution Consulting for the Local Government Association.
The returns put the sector in the top quartile of returns for private equity across all industries, according to the annual British Venture Capital Survey.
Anntoinette Bramble, chair of the Local Government Association’s Children and Young People Board, said the margin figure was “concerning”.
“Not only should providers not be making excessive profit from these placements, but their income is almost solely reliant on fees paid by councils who are reporting severe budget deficits in children’s services and experiencing substantial impact of Covid-19 on their income,” she said.
The 20 largest providers of children’s homes, fostering services and special residential schools increased income from local authority fees by 9 per cent to £1.58bn, according to an analysis of reports filed to Companies House between January 2020 and January 2021.
But there are growing concerns that the sector is failing to deliver for children and that taxpayer money is leaking out to private providers. The average placement costs £4,000 a week but fees have been reported at £10,000 a week in some cases, despite Ofsted inspectors’ reports detailing serious concerns over care quality in several homes.
A government-commissioned review into failures in the children’s care system was published this week, while the Competition and Markets Authority has launched an investigation examining the lack of availability and increasing costs, due to report later this year.
Still, the children’s care sector has experienced a surge in deal activity. Elysium Healthcare, which runs 70 sites including special schools and mental health services for children and adolescents, is being sold by BC Partners, which has appointed JPMorgan to run the sale. Elysium declined to comment.
Meanwhile, the share price of the only stock market listed provider, Caretech, which looks after 2,000 children through 191 residential facilities, schools and fostering offices, has risen by 50 per cent in the past year, giving it a market value of £665m. It received £294m in local authority fees for children’s services while profits before tax, depreciation and amortisation, were £58.3m. It has an ebitda profit margin of 19.8 per cent.
“The reviews have made people draw a breath on transactions but they have not stopped altogether,” said Andrew Rome, author of the Revolution report. “The market is confident the alternative costs of taking services in-house are too expensive.”
However, any negative outcomes from the two reviews could make deals more difficult to strike and debts more difficult to renegotiate.
Other providers including Outcomes First, which is owned by private equity firm Stirling Square Capital Partners, and Keys Group, which is owned by G-Square Capital, have also reported rapidly rising profits and margins of 15-20 per cent.
Children’s’ care providers are far more profitable than other care sectors. The top 26 adult residential care providers had a combined 7.4 per cent margin according to Nick Hood, analyst at Opus Restructuring.
“It’s reasonable to get a fair return to facilitate the future investment the sector so desperately needs but what is not right is that they make profits that dwarf other parts of a barely-profitable care sector, or indeed major corporations in the wider commercial world,” Hood said. “This is especially so when that return is being generated from funds provided largely by the UK taxpayer.”
Liz Cooper, deputy chief executive at the Independent Children’s Homes Association, which represents providers, said local authorities would be unable to meet care needs without private provision and that current regulations had resulted in high staffing levels and small homes, which pushed up costs. “We are confident of the value that we provide,” she said.
But the LGA is concerned that the high debt of operators in this sector could lead to corporate collapses, with local authorities left to pick up the pieces as happened with the care home operator Southern Cross in 2012.
According to the Revolution study the eight private equity providers included had total bank debt of nearly £1bn.
“You can understand that people see the debt levels as a concern,” said Rome. “This model of financing is only sustainable if there are investors and banks that continue to have confidence in the sector.”