Adam Scott, partner, and Abhishek Patel, senior analyst, at Mansfield Advisors believe larger providers can create value, implement efficiently and be advocates for greater ambition for vulnerable children
UK children’s services have been a hot bed for private equity activity over the last decade. Multi-segment platforms now operate across these £7.2bn markets, comprising special education, fostering and residential care.
Stirling Square Capital’s NFA Group acquired – and has retained the brand of – Outcomes First Group (OFG) from Sovereign Capital in December 2019 and is now the clear leader in children’s services with both specialist education and fostering.
Polaris is now the new name for the second largest fostering agency after CapVest’s Core Assets Group (including its well-known Foster Care Associates brand) acquired PiCS (Partnerships in Children’s Services) again from Sovereign Capital. The press reported the deal as worth £100m.
There remain several similar secondary investment opportunities. Charme Capital’s Witherslack Group, G-Square’s Keys Group, Graphite Capital’s Compass Community, and Antin Infrastructure Partners’ Kisimul Group were all acquired in 2017, so should all be available again this year or the next.
You may ask if there is a clear rationale and opportunity for investors to continue consolidation, and does scale add value or simply concentrate reputational risk? We believe larger providers will be fundamental to improving the quality, consistency and effectiveness of care, but they will need a clear strategy to both implement and communicate that value to local commissioners and the public.
We will explore that point further but let us first discuss whether these markets would be considered attractive by typical measures and worth the consideration of the new strategic options which are possible with size.
British care services for children remain fragmented sectors, with plenty of targets available once you have that first crucial platform. In both special education and residential care, the top ten groups comprise only a third of the acquirable total, which includes a long tail of single sites. Fostering’s top five groups have only consolidated around a half of that subsector. At first glance, these are clear buy-and-build opportunities.
English private supply grew through the 2010s at twice the rate of public (local authority) provision in special schools, four times the rate in fostering, and already comprises ~80% of children’s residential homes.
This has been possible without explicit public provider exits or policy change because demand has grown without commensurate public capacity. Private providers have always tended to focus on more difficult cases – not necessarily more challenging children of course, but dependent on the circumstances – and in our meetings with commissioners they tell us they expect this to continue.
Local authorities protect their budgets for children, and this was clearly shown after the last financial crisis, and we expect the same through any post-Covid period of fiscal restraint.
Taken together, corporate providers benefit from growing demand, increasing aspirations and a reliable payor who prioritises these services.
Larger providers should create value in greater transparency and consistency in service quality, be more credible with commissioners when developing new services and – we would argue – more aspirational leadership. Significant local presence also offers local economies of scale and potentially a longer-term relationship and insight into each child.
However, local commissioners still prefer a competitive and open market for provision, and there are few examples of comprehensive ‘outsourcing’ of an entire function, like child protection.
Size also aids recruitment and corporate approaches can support effective administration and professionalism. The trick is to use corporate spend to support individual frontline staff to do their best work. That is only achievable if there is contractual and pricing discipline, otherwise there is a risk of inadequate package provision for individuals or even an entire service with unacceptable risks and outcomes.
Recent mergers between major groups have resulted in some attention from the Competition and Markets Authority (CMA).
Before it merged into Outcomes First, NFA’s earlier acquisition of Acorn Care and Education did require the divestment of three schools. Also the merger of Core Assets and PiCS to make Polaris did get CMA attention. However, no divestment was required in this fostering deal. The CMA believes a special school could dominate its local market, though we would argue any price impact is small or it would attract competitive entry.
In fostering there is already an effective ceiling to local market shares at ~30-40% as local authorities do not want to be too dependent on a single provider.
Almost all will share anecdotes, unprompted, of success or failure in care of children and teenagers, and their frustration at the struggle to show their positive impact
Anne Longfield, outgoing Children’s Commissioner for England, recently called for a CMA review of competition and prices. The irony is that when we speak to providers and their private equity backers, they want to talk in depth about what can deliver better results and how to communicate that.
Almost all will share anecdotes, unprompted, of success or failure in care of children and teenagers, and their frustration at the struggle to show their positive impact. Then this well-intentioned children’s commissioner wants to rather talk about arcane aspects like debt or ownership structure, based on an apparent fear that someone, somewhere is profiteering by running a business for cash rather than long-term shareholder value and allowing standards to slip.
We think this is unlikely when commissioners are knowledgeable locals, the markets are highly competitive and facilities are visited by both national inspectorates such as Ofsted and often the relevant local authorities.
Josh MacAlister, appointed by the government in January to head an independent review, has already publicly written to the CMA asking a review focusing on ‘out of area placements, placement breakdowns, the use of unregulated provision and the role of independent sector provision.’
The Local Government Association has also called for oversight into the financial status of providers, like care homes for older people.
Many investors may call this ‘reputational risk’, but it is not a risk based on operational performance which can be avoided through sensible investment and management. It is instead frequent public criticism of corporate providers, which discourages many of the more well-known firms. We suspect this is a pity, because it discourages some major firms we consider to be highly proactive and aspirational possible owners.
Despite all this attention, there is little to no worthwhile government analysis of the value created by interventions such as fostering or a special school. It would be worthwhile simply to start measuring inputs systematically even if results or outcomes measurements are challenging and long-term.
The British state has not yet begun designing children’s care markets where providers can compete on quality and value.
We realise this is not straightforward and there are no obvious international examples, but that was also the case in elective healthcare procedures and despite the controversies, data now has a big influence on how things are done.
Some service recipients are asked about their experiences by inspectors, but there is no systematic, objective and long-term data collection by the state.
We suspect this is a pity, because it discourages some major firms we consider to be highly proactive and aspirational possible owners
The value in children’s services
Fostering saves families by allowing parents’ time to get their lives back together. Teenagers can have their whole life trajectory changed by the right interventions in a residential facility. Special education can give a lifetime of participation in society and self-worth to children with very unusual and demanding needs – that is why parents fight so hard for the budget authorisation to get them a place.
Despite this potential for good, commissioners and social worker team leaders tell us that there’s wide range in the perceived quality of the support that foster carers receive from their organisations, and the culture and performance of a single site facility can often decline quickly.
There is too little corporate incentive to identify and create value on dimensions that matter to the child, though we note the system has improved. Modern inspections and local commissioning do provide clear incentives for better processes and the avoidance of major problems. But larger providers should have the ambition to aim higher than that, and help these sectors avoid any perception that they are only temporary stopgaps, rather than impactful interventions that payoff socially and financially over a lifetime.
Creating and demonstrating value
Large independent providers currently lack objective input measures and medium-term performance metrics to create and demonstrate value to commissioners.
Synthesised analysis of comparative data does not happen, and success stories are scarce and remain anecdotal.
Currently, no provider knows what happens to their children when they leave their provision and care. In comparison, healthcare data on clinical outcomes (readmission rates, infection rates…) have become widely used and publicly scrutinised. This approach has a long way to go within children’s services, but it has begun, and amid much controversy, is starting to have an impact.
In 2019, the Department for Education with the Rees Centre and Nuffield Trust published an ‘outcomes framework’ including personal safety, psychological and emotional wellbeing and educational progress.
This is a worthwhile first step and needs the support of leading providers to build on this.
If the data were collected across providers for local authorities, then commissioning choices could be understood and valued appropriately
There is not yet any push for measurement of long-term outcomes post-care, even though academic studies tend to show tremendous returns on state spending in early and consistent childhood interventions. For example, analysis led by Carey Oppenheim of the Early Intervention Foundation in 2015 estimated the total cost of late intervention on children and young people at £17bn per year in England and Wales.
We believe independent providers should not wait but show initiative to gather data wherever feasible on measurable inputs and immediate outcomes.
Data collection requires some careful thought and design, but privacy laws are intended to protect individuals through requiring rigour and due care, not to preclude effective monitoring and insight into vulnerable groups.
Where there is a will, there is a way. Providers should at least start with levels of psychological and emotional wellbeing, personal and care workers ratings of education and training, avoidance of risky behaviours and placement breakdowns. Larger providers have the credibility to argue for public tracking of these measures into adulthood.
Providers are only responsible for a short period or one care element, so responsibility is difficult to assign. If the data were collected across providers for local authorities, then commissioning choices could be understood and valued appropriately.
This healthcare-style approach to outcomes reporting would realign and incentivise independent providers to deliver the best quality for their children to maximise their chances of success in later life, and thereby contribute more widely to society.
These efforts would improve the standing of the sector, among commissioners and the wider public, even long before they create clear incentives and support for providers to improve.
We believe larger independent providers can create value, implement efficiently and be advocates for greater ambition for the most vulnerable children. The market is as objectively attractive as any other, it requires investors confident enough in their management teams and able to accept some undeserved public carping while prepared to visibly lead the sector’s performance.
These children are a public responsibility, and so we all profit if investors and corporate providers are transparently rewarded for the good they do achieve.