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In 2002, the venture capital company 3i led a £267m buy-out of the care home operator Westminster Healthcare. When Westminster was sold on, late last year, to Barchester Healthcare, it was valued at £525m. In just over two years 3i had quadrupled its initial investment and gleaned over £220m at an internal rate of return of over 80 per cent.

It is figures such as these that have had venture capitalists increasingly drooling over the social care sector. The introduction of stringent new regulatory standards for care homes, a growing involvement of the private sector and changes in the way local authorities commission services have created a care industry that, in financial parlance, is "ripe for consolidation".


In practice this means smaller care providers being swallowed up by medium-sized companies which, in turn, are merging to form national conglomerates backed by venture capital. With their greater purchasing power and lower central overheads, these larger companies are able to operate more efficiently than their small counterparts and strike harder bargains with cash-strapped local authorities. As the smaller providers get squeezed out of the market, the larger companies pick up their business, generating juicy returns for their venture capitalist backers.

In the past year alone multi-million pound management buy-outs have been announced at the Four Seasons care home group; the care home property company NHP; the Orchard End Group which provides specialist care homes for adults with permanent learning difficulties; Green Corns which runs care homes in the North West for children aged eight to 18 with behavioural problems; Farrow House which provides adolescent care services on the east coast of England, and Herts Care which provides crisis care homes for children in the West Country.

What all this financial activity means for the staff and service users is difficult to determine. Clearly one concern must be that as the men in suits move in, pressure to reduce costs and maximise profits will inevitably jeopardise the standards of care.

However, according to Andrew Rome, this need not be the case. Rome is managing director of Sedgemoor, a nationwide firm providing residential care and education for children and young people with emotional and behavioural difficulties. In 2000 the company underwent a £13m buyout backed by venture capitalists ECI.

Although the new regime has given the firm scope to expand the services it offers, Rome says that most of its young residents will hardly have noticed the difference.

"On one level there's been no difference at all," he says. "Sedgemoor has always been a private firm, so all that's changed is we now have a different set of shareholders." The quality of services on offer is as high, if not higher, than it has ever been, claims Rome. "Because of the new standards and regulations in the industry we now have very specific indicators of quality of service, and that has given us clear evidence of how our service is improving," he says. "Even comparing 2004 with 2003 we can see that the quality of service is improving."

Although the extra financial muscle offered by Sedgemoor's venture capital investors has helped make this improvement possible, Rome emphasises that it is not all about money.

"One of the things that venture capital firms can bring is a certain synergy and strategic focus to the development of a company. It's not just about the extra funding. They also bring in new people with new expertise and help the firm grow in ways that might not have been possible before."

Sedgemoor has more than doubled in size since the 2000 buyout.

Rome predicts that venture capitalists' interest in children's services will not be shortlived. As the sector tightens up what he calls its "traditionally quite inefficient" working practices and local authorities seek out providers who can deliver a wide range of services that all exceed the new minimum standards, there is likely to be little need for old-fashioned, family-owned care home businesses.

"It's clearly a unique period in the delivery of children's services," he says. "With the Children Act 2004 there is a clear political focus on improving both the standards and the commissioning of services. There are those who speculate that as local authorities improve their commissioning practices they will be looking towards the sort of contracts that the larger service providers are in the best position to deliver. So there will need to be quite a lot of consolidation within the industry."

One man who is constantly on the look-out for social care businesses to "consolidate" is Ryan Robson, a partner at Sovereign Capital, one of the country's leading private equity investors in health and social care. Prime candidates for Sovereign's attention are small to medium-sized care providers that have already forged good reputations with their clients and, importantly, their local authorities.
"We are looking for businesses that are already offering a good level of service and are profitable," says Robson. "They may be family-owned companies that have grown from nothing to, say, 10 homes locally. But they don't have the capital or the expertise to grow from local to national players."

Sovereign will help provide both the capital and the expertise, says Robson.

A typical investment is between £5m and £20m. The company is also likely to bring in its own team of managers, offer continuing strategic advice and provide access to an extensive network of contacts.

"As well as financial support what we are also good at is spotting managers who have come through the same sort of route but who have the skills to take the company to the next level."

Like Rome, Robson stresses that quality of service is of paramount importance when seeking to make a profit from the care sector. "This is not like investing in a manufacturing industry where you might want to go in and immediately start driving down the cost base. We are not about treating children or elderly people as a commodity. We are about improving services and the management infrastructure so that the company is able to offer the range and quality of services that local authorities are likely to commission."

Nevertheless, venture capitalists eventually expect to see a return on their investment. So, while most of the recent management buy-outs are considered to be medium to long-term investments, it is likely that many will be sold on in the not-too-distant future. Indeed, according to a recent report, up to £700m worth of assets in the older people's care home sector are currently being prepared for sale as their venture capital owners seek to cash in on their investments.

For many working in the social care sector, this horse trading in essential services for vulnerable people appears, at best, distasteful and at worst detrimental to the quality of services. But with the private sector's involvement in social care continuing to increase and the ever present pressure on local authorities to improve standards while cutting costs, it is likely that the current trend for mergers and acquisitions will continue for some time to come.