January 20, 2013 4:39 pm

Fostering sector ripe for consolidation

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Chantel, a severely disabled 11-month-old girl, cannot cry or talk, and uses only small gestures to communicate with her foster parents. Since February 2012, they have been paid roughly £350.00 a week by Caretech, a FTSE-listed company, to look after her and give her as good a “quality of life as possible”.

Robert Biddlecombe, along with his wife Ann, are at the frontline of a growing market in foster care, which is increasingly run by private equity firms or small businesses. Although the companies need to keep profits in mind, for carers such as the Biddlecombes the money is almost irrelevant.

“We get a lot more than we put in,” says Mr Biddlecombe. “It’s not about the money. If you divided the hours up it would be way less than the minimum wage. Clearly, it makes life easier that we don’t have to worry about the bills, but it’s not about that, Chantel is just a pleasure. She is so amazing.”

According to research by Laing & Buisson, the healthcare specialist, about 40 per cent of the 220 foster care organisations in the UK are run by the private sector, and although many are small mother and father operations, some of the world’s biggest private equity houses are also active in the industry, including Graphite Capital, which bought the National Fostering Agency for £130m last year, and August Equity, which has just bought Compass Services for Children.

Private equity and other companies have been attracted to the sector largely because they can see the potential for cost savings and economies of scale, particularly in administration and training, through consolidation and by increasing the volume of cases on their books. The fostering company recieves a fee from the local authority, about half of which goes to the carer.

Their competitors are often foster carers or people with nursing backgrounds, who have decided to use their expertise to create small businesses, or charities. But many are struggling and open to a sale.

Local authorities have frozen the fees paid to foster care providers for the past three years while fuel, food, and insurance costs have risen, as well as regulatory demands around training.

Upfront costs are also high – companies need to recruit and train foster carers before they can pitch for individual children and, with a shortage of foster carers, this can prove expensive.

But fostering is a growth market. More than 50,000 children were placed in care in 2012, up 3.7 per cent in 2011, according to official figures. The number is widely expected to grow as benefit cuts pile the pressure on struggling families and children with severe disabilities are given life-prolonging medical treatment.

In a rare case of the most economical means of care also being widely accepted as the best, fostering is much cheaper for the government. The annual cost of a foster care placement is around £26,700, compared with a children’s home at about £130,000 per person a year.

The trend towards foster care has been given added impetus by the death of Baby P, a 17-month old boy who died at the hands of his stepfather after repeated injuries.

With the local authority held responsible for failing to take action, councils have become more risk-adverse, outsourcing the management of their fostering services to the private sector.

Meanwhile, social workers have also became more inclined to take children into care, even for a short space of time, because “nobody wants a Baby P on their hands”, says Caroline Ellis, who manages CareTech’s fostering services. “Local authorities will remove that child and do some preventative work with the family and then rehabilitate the child back with the parent,” she says.

The growth in the market has already sparked a wave of merger activity. Caretech, which also runs adult learning disability, children’s and mental health homes, became the first stock market-listed company to enter the sector in 2010, with the purchase of four fostering groups for £14m.

But analysts say that the sector is ripe for consolidation and that support services groups such as Mitie, Serco and Interserve, which have already entered the community health market, could also find foster care attractive.

Justin Crowther, an analyst at Catalyst Corporate Finance, says: “It’s a classic private equity play. Private equity have been consolidating and investing in the fragmented domiciliary care space [which covers care at home for the disabled and elderly] for the last five years; and have begun to exit those investments to facilities management businesses. You can see something similar occurring in the fostering space.”

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