Private equity invests in fostering children

From: The Times
September 3, 2007

About 5 per cent of Britain’s 41,700 fostered children are being placed by agencies owned by private equity firms

by Robin Pagnamenta

They play an ever-increasing role in British life - running our shops, hospitals, collecting our rubbish and managing our finances. Now profit-hungry private equity firms are queueing up for another business opportunity - fostering children.

Research by The Times indicates that about 2,000, or about 5 per cent, of Britain’s 41,700 fostered children are being placed by agencies owned by private equity firms.

The figure is rising fast as the provision of child fostering services to local authorities shifts gradually from a voluntary activity undertaken by individuals and charities to an increasingly professional big business, worth about £890 million in fees last year, according to the healthcare information provider Laing & Buisson.

Already, four of the largest fostering agencies in the UK are owned by private equity firms. They include the National Fostering Agency, the second-largest agency in Britain, which places more than 1,000 children in foster homes. It was bought for an undisclosed sum in December 2006 by the private equity firm Sovereign Capital.

Another, Phoenix Equity Partners, owns two fostering businesses, Fostering Solutions and Acorn Care and Education. Pathway Care is owned by ISIS Capital Management.

“It can be very lucrative,” one industry consultant said. “They are being attracted by high profit margins and strong demand for fostering placements from local authorities.”

Child fostering also offers the security of winning long-term government contracts. Historically, local authorities identified foster carers and placed children on their own - usually with volunteers who expected little in return other than the satisfaction of helping vulnerable children to escape from difficult circumstances.

The motivations of most carers may not have changed, but the economics of child fostering has been transformed in recent years, nevertheless, and private equity firms have been among the first to cash in on an emerging trend. A steadily growing number of troubled children who require care, combined with a chronic shortage of places at foster homes, has led to the creation of a thriving business in fostering agencies that work on behalf of local authorities.

Typically, a local authority will pay an agency about £800 a week to foster a child. The figure is split about 50-50 between the agency and the host family. The agency usually will offer a package of additional help for foster carers, including training, holiday cover, telephone helplines and paid support officers.

According to Pathway Care, families can receive “up to £18,000 per child per annum, depending on regional allocation”, so host families willing to accept several children can receive substantial sums of money. The number of children in foster care in the UK rose from 32,300 in 1995 to 41,700 in 2005. Groups owned by private equity firms are thought to be dealing with about 2,000 children, but this figure is growing fast, as the firms buy up smaller operators.

The total amount of money being paid by local authorities to private fostering companies is believed to be growing quickly and could soon be more than £1 billion a year.

A spokesman for Phoenix said that Acorn, for example, had revenues of £20 million last year. The trend has been encouraged by a government White Paper, Every Child Matters.

However, the emerging child fostering industry in Britain remains highly fragmented, with hundreds of nonprofit organisations, individual carers, families and local authority players operating alongside independent companies and groups owned by private equity.

The overall trend, however, is towards greater “professionalisation”, with many of the smaller operators gradually being edged aside - or bought up - by bigger and better-funded businesses.

The growing role of the private sector has helped to encourage more families to foster children and has brought some benefits, such as greater training and investment. It has also reduced local authorities’ dependence on children’s homes, which are often considered the worst alternative, resorted to only when family placements cannot be found. Yet fostering experts say that the trend also raises concerns. “Many children in foster care are extremely vulnerable, and making a profit should never come before meeting their needs,” Andrea Warman, of the British Association for Adoption & Fostering, said.

She noted that one potential problem of the recent changes could be the loss of some small, often not-for-profit, foster care organisations that specialise in niche fostering services - for example, providing placements for refugee and asylum-seeking children, young people with disabilities or those who exhibit more challenging behaviour.

Ms Warman said that all fostering services must be regulated properly and that there must be a rigorous inspection process to ensure that high standards are maintained across all fostering organisations.

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