Private equity and residential care of children: the threat to quality

Invest, expand, sell: the business model employed by private equity companies is simple. Yet in children’s social care, where many are now choosing to invest, it is proving controversial. Critics in the sector are lining up to attack the business ethos of these companies, arguing that it conflicts with the principles at the heart of good quality children’s social care. Typically, private equity (PE) companies aim to make a return on their investment within three to five years and this, say their detractors, means they have no long-term commitment to the vulnerable children in their care.

PE companies invest in businesses ­ranging from high-street stores to healthcare organisations, and their involvement in social care is not new. Ten years ago they began to invest in adult social care and, until now, they have been quietly gaining a foothold in the social care sector without attracting much attention.

But the collapse in October 2007 of major children’s provider Sedgemoor, which was bought by PE group ECI seven years earlier, prompted accusations that these companies are investing, raiding the social care coffers and then moving on (see The End for Sedgemoor).

Scaremongering

According to Wol Kolade, head of PE firm Isis, this is a negative and inaccurate representation of the way PE firms work. His company invests in several social care businesses, including private fostering agency Pathway Care, and he describes the claims as scaremongering by people unable to accept new ways of delivering children’s social care.

“None of this is based on fact there is no evidence to support it,” Kolade says. And it is true that analysis or research into the impact of private equity firms on the social care sector is non-existent, despite their growing presence.

Nevertheless, there is no shortage of people who have worked in organisations backed by PE firms who are keen to expose practices they claim damage the quality and sustainability of services for children. However, none is prepared to be named, fearing reprisals from ex-employers.

For Phil* it was the barely-veiled threat to his job that signalled the end. In the months after the children’s provider he worked for was taken over by a PE firm, he became increasingly uneasy about the emphasis placed on financial targets. Time and again he was pressured to accept referrals for children who he knew would be better off placed elsewhere. He knew it was time to leave when he stood firm on his decision not to accept one particular child only to be persuaded to change his mind by his boss telling him to “think about your job”.

“I have no qualms about working for a business,” he says. “I’m in the private sector now and the standard of care is bloody good. What I objected to was the priority given to profit above all else.”

Heads on beds

Another former employee of a PE-backed firm providing children’s residential care says the focus was “getting heads on beds”.

“I went from having regular contact with staff and young people to being told I needed to drop that aspect of the work and concentrate on sales. I was being asked to place children and sometimes I would have my fingers crossed that the place would be suitable.

“It wasn’t just the work itself that was affected. The personnel and training functions quickly became a corporate weapon. Part-time employees, many of whom had children, were made redundant and their posts made into full-time ones. The bosses looked to save money on training by repackaging it as an online model. But with social work, you really need it to be face-to-face.”

Cost-cutting, streamlining and efficiency are all familiar concepts to anyone working in social care. But PE companies have their roots in manufacturing and therein lies the problem: while it may be possible to estimate the financial benefits of replacing one factory machine with another, pinpointing what works in social care is not so straightforward. Managers with no sophisticated understanding of social care who are struggling to meet stringent financial targets may turn their attention to core parts of the service itself and unwittingly make cuts that have disastrous consequences.

Reduce therapists

As Nigel,* a former operations manager of a PE-backed organisation, says: “The care you give is always under threat by the dollar. In this work there are some things that you cannot justify the cost of. Because we do not fully understand what works it is easy to cut something out by accident that might stop it working. We were asked to reduce significantly the use of therapists because the accountants, who make these decisions, couldn’t see any quantifiable benefit.”

Social care experience is, of course, valued by PE firms, whose business savvy means they are likely to appoint people with a solid background in the sector to senior positions. Kolade is keen to point out that Pathway Care’s chief executive is a former chief operating officer at charity Save the Children. However, a large part of Peter Harlock’s career was also spent in banking.

Nigel says that, although he was hired for his social care expertise, it was a team of accountants that ran the business. “If you fail to meet your budget, you are verbally beaten up. But if you come within budget you are then told it was only a soft budget to begin with. It’s a no-win situation.

“Often you are the only person with a childcare background up against a bunch of accountants or non-industry people. You are the only one holding up childcare principles a lone voice. Because everything is about targets it is a brutal environment. You are impotent and bamboozled by figures.”

Kolade is angered by unfavourable comparisons between PE-backed children’s providers and, for example, family-run businesses. “Businesses are not necessarily good because they are family-run,” he says. “And just because a family runs a business it doesn’t mean they are committed. Look at what happened when the regulations came in for care homes in the adult market: lots of family-run care homes closed.”

While insisting that PE firms can be very committed, he concedes that there is anecdotal evidence that some people have had unhappy experiences. However, he warns against overstating individual encounters: “Every sector has negative experiences. If you look at local authority provision or the not-for-profits you will find many examples of inadequate care,” he says.

Attractive investment

He adds that it is not in the company’s interests to focus on profits at the expense of quality because, within six months, the damage to the provider’s reputation would be reflected in a poor Ofsted report.

Whatever the fears over PE companies, one thing is certain: they are here to stay. Investors in children’s residential care – a saturated market – now have their sights on fostering. The government’s push on fostering makes it an attractive investment option. And, with many of the privately run fostering agencies set up more than 10 years ago now coming up for sale, as owners look to sell up and retire, there are plenty of investment opportunities.

With PE firms likely to remain in the sector for the foreseeable future, consultant Andrew Rome warns that local authorities as commissioners and Ofsted and the Commission for Social Care Inspection as regulators will increasingly need to be clued up about the financial health of providers.

However, we are some way from this becoming a reality. “My experience of local authorities is that only a minority use their power to ask for financial information or credit checks,” Rome says. “For many, it’s new territory and they don’t have the financial sophistication to interpret the information.”

David Walden, director of strategy at CSCI, adds: “It’s not really the role of a care regulator to understand the way the finances work. Rather councils should have an emergency plan for dealing with failure. We need to be realistic about how far we can get behind the figures.”

* Names have been changed

Contact the author

Sally Gillen

Do you work for a private equity firm? Tell us your experiencies at comcare.letters@rbi.co.uk