Private equity hurts children’s social protection, critics warn

The UK child welfare system is ‘damaged and distorted’ by the involvement of private capital, respondents to a study on the industry have warned.

The Competition and Markets Authority (CMA) launched a market study in child welfare services in March to examine the lack of availability and rising costs. As part of this, CMA requested comments which it posted on its website on May 20.

The whole system “is increasingly damaged and distorted by the financial interests of private equity investors and financially exhausted by the business imperative of private care companies to extract profits from shareholders,” Children England said.

The comments come at a time when the involvement of private equity in social care is increasingly being examined, with recent studies noting that equity buyouts of nursing homes reduce the quality of care. The traditional leveraged buyout model – funded largely by debt – is also seen as putting additional pressure on companies whose goal should be to provide the best care for children.

Several providers in the UK are owned by private equity firms, including Horizon Care, which was acquired by Graphite Capital in 2019 and Keys Group, acquired by G Square and Orbis Education & Care, backed by August Equity.

In January, the Association of Local Authorities (LGA) published research showing that the six largest providers of children’s investments made a profit of £ 219million last year and asked the care journal to study the impact of private equity and stock market involvement in the children’s social protection system.

In its response to the CMA, the LGA said the growing number of children in care and the lack of resources make it an attractive market in which to invest for private equity firms. However, he cited research which shows that “benefits owned by PEs carry a higher financial risk profile than other types of providers.”

The LGA said four of the seven largest groups – all owned by PEs – carried more debt and liabilities than tangible assets.

The big problem, according to the Children’s Commissioning Consortium Cymru, is that the majority of private equity providers don’t necessarily have an integrated model of care. The costs are also not transparent and they tend to charge for additional services.

“They tend to grow their businesses quickly, which leads to significant problems, especially when it comes to recruiting and retaining good quality staff. Salary scales tend to be set at minimum wage with poor employment conditions, ”he added.

Some of the respondents, such as Outcomes First Group (OFG), the largest private sector operator in child-friendly education and social services, disagreed with this sentiment.

OFG, which was acquired by private equity group Stirling Square Capital Partners in 2019, said the PE group is “ capable of providing management discipline, corporate governance / accountability and access to strong capital reserves ”. He added that since Stirling Square’s investment, OFG has been able to expand its overall capacity, as well as maintain quality levels.

“PE investors today need to have a long-term mindset, because businesses can only be successfully sold to the next owner if they are already well positioned for the next five to seven years of growth,” he said. he noted.

“Operators belonging to SEs tend to be larger and more diverse, while at the same time having strong management systems and processes.

OFG also added that although PE-owned employment agencies may have more influence than others, in the last 20 years of private equity participation, no PE-owned operator has failed or did not encounter any problems related to the level of debt financing.

In the meantime, the Balanced Economy Project has submitted its own research to the CMA, which analyzed the accounts of 13 of the largest nursing home providers and / or foster organizations.

He found that, on average, private equity firms had negative net assets, very low interest coverage, high levels of debt and that it would take more than a decade to pay off their external debts and more. 15 years to repay their total debts. In addition, they found that private equity firms’ internal borrowing was charged interest at rates of 7-14% per annum, above market rates.

“ Based on our early evidence in the children’s social services industry and our broader international knowledge of the private equity industry, we consider these companies to be totally inappropriate partners for this industry and should not be beneficiaries. publicly funded contracts, ” Nicholas Shaxson and Michelle Meagher wrote in their response.

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