Rising demand for children’s services such as children’s homes, schools and foster care has driven a surge in investor interest in the sector with a number of deals in the pipeline.
Key deals include the sale of Elysium Healthcare, which runs 70 sites including special schools and mental health services for children and adolescents, for an estimated £900m, according to two people close to the process. It is being sold by BC Partners, which has appointed JPMorgan to run the sale. Elysium declined to comment.
Keys Group, which runs more than 20 schools and 100 residential facilities for looked-after children in the UK, is on the market for an estimated £250m, said two people with knowledge of the deal. It has appointed Rothschild to advise. Keys Group declined to comment.
Although referrals for care fell from the end of April as the pandemic intensified and schools closed, children’s homes remained open and government funding to specialist schools continued, so most businesses in the sector were relatively unaffected, according to a report by LaingBuisson, a consultancy that provides healthcare data to the UK government.
Henry Elphick, chief executive of LaingBuisson, said the £14bn-a-year market in England was “reaching a scale and maturity that makes it increasingly attractive to investors”. “The appeals of the sector are clear — a sizeable market, an outsourcing of provision to the independent sector, increasing demand and a lack of supply,” he added.
The number of children in care in the UK increased 11 per cent in the five years to March 31 2019 to about 98,756, while real-terms spending increased about 4.4 per cent as the government sought to fulfil its statutory duties, according to LaingBuisson.
In England, the public sector provides nearly £10bn of services, while the independent sector provides £4.1bn with a continued shift towards the private sector, LaingBuisson said.
The proportion of services provided by the private sector is highest in special schools and colleges, where about one-third of all spending, or £1.2bn, went to the private sector in 2019. This was followed by residential care for children at £1.15bn for 2019-20 and fostering at £790m.
The larger providers with a focus on special education were the most profitable, LaingBuisson found, partly because they charge higher fees — an average of £45,105 a year for a full-time day place, versus £23,175 for a local authority run school, though the report notes that some state-run facilities provide less in the way of highest-needs support.
Michelle Tempest, analyst at Candesic, a consultancy that advises on healthcare deals, said investors were “flocking to the sector because of its non-discretionary government spend during troubled economic times”.
Average yearly charge for a full-time day place
But she warned that although there was a need for investment in the sector, it was “not an easy venture”. “This is a controversial area and there is a huge reputational risk to these investments,” she said. “Investors need to prove they can deliver the quality of services that children deserve.”
Although healthcare ventures tend to be privately owned, CareTech, which runs children’s homes and fostering services, is listed on the London Stock Exchange. Arcadia healthcare, which owns the Priory, is listed on the Nasdaq stock exchange in the US. The Priory, England’s largest mental healthcare provider for children and adults, has been up for sale for several months with an estimated £1bn price tag.
About 20 private equity companies such as Stirling Square, CapVest and Charme are heavily invested in the sector, the report found.
LaingBuisson found that margins on earnings before interest, taxes, depreciation, amortisation and restructuring or rent costs varied significantly from a high of 30 per cent to a low of 3 per cent in 2018, with an average of 16.1 per cent across providers.