Serious concerns have been raised over the growing influence of private equity in the provision of children’s care homes, after an Observer investigation revealed that the number of homes backed by investment companies has more than doubled over five years. The news comes with children’s social care directors, council leaders and campaigners for those in care accusing some businesses of profiteering from their involvement in children’s social care. Increasing numbers of councils are warning they face bankruptcy as a result of rising costs. Several care home providers backed by investment companies are also heavily indebted. Analysis of Ofsted and Companies House data by the Observer found that 863 registered care homes providing care for vulnerable children in March 2023 were fully or partially controlled by investment companies, including private equity, venture capital and foreign funds. This is an increase of more than double the 353 backed by these types of enterprises five years ago. Close to one in four places in a children’s care home in England now ultimately have the involvement of an investment company, up from one in six in 2018. The analysis identified more than 20 investment companies with stakes in the children care homes sector in 2023. Sovereign wealth funds from Qatar and the emirate of Abu Dhabi are among those involved. The analysis has been revealed as government officials work with Ofsted to draw up new regulations after the Department for Education (DfE) said that “profiteering in the children’s homes market is wholly unacceptable”. Some council officials are demanding price caps. Industry experts said that private equity and investment groups had been attracted to the sector in recent years by the growing demand for children’s care, especially for those youngsters with complex needs. While councils have struggled financially for more than a decade, they are legally obliged to find appropriate specialist care, education and accommodation for children recognised as requiring the state’s support. This appears to have provided reliable income for investment groups. Big groups with investment company involvement include the Keys Group, controlled by the private equity company G Square Healthcare Private Equity. G Square increased its interest in registered care homes from 79 in 2018 to 116 by March 2023. A recent analysis found that the Keys Group, whose services also include specialist care and education, had pre-tax profits last year of £27.7m on all its activities – 22.4% of its income. It also had net tangible liabilities of £128m. The emirate of Abu Dhabi entered in the market in 2021, acquiring the Witherslack Group via its Mubadala sovereign wealth fund. Witherslack’s annualised pre-tax profits were recently estimated to be £39m last year. That represented a margin on all its activities – which are focused on special education needs provision – of 26.5% of its income. The same analysis found it had net tangible liabilities of £284m. The Qatar Investment Authority sovereign wealth fund also has a small stake in the English children’s care home sector, controlling the Senad Group. Another investor is the Cambian Group, a subsidiary of CareTech Holdings Ltd, which was recently sold to a consortium created by the co-founders of CareTech and involving the fund manager Three Hills Capital Partners. The Observer’s research, based on the latest public data on registered children’s care homes, found that the consortium was the ultimate owner of 218 children’s care homes, representing 888 places. Cambian Childcare, which also delivers specialised education, made more than £25m profit before tax last year on all its activities – about 23% of its revenue.Figures in private equity said that they were providing crucial and highly specialised services that were often highly rated by Ofsted – and that residential placements were just a small part of their services. They also pointed to a Competition and Markets Authority report that said there was no evidence that state provision of children’s homes would be any cheaper. Sources familiar with Witherslack’s operations said it was primarily a special education needs provider, with about 88% of pupils in day-only education placements – and that all profits are re-invested to deliver new schools and residential provision. CareTech did not wish to comment. Three Hills Capital Partners, Keys Group, G Square and the Senad Group were all contacted prior to publication. John Pearce, president of the Association of Directors of Children’s Services (ADCS), said his members were “very concerned about increasing private equity involvement in the children’s residential care system and the knock-on effect this is having on the cost and quality of homes, but above all else on children”. “The independent review of children’s social care and Competition and Markets Authority have called out profiteering in the children’s placements market,” he said. “It is wrong that private companies can generate significant profit from children and the public purse, particularly when this is set against a growing number of local authorities declaring they are effectively bankrupt, or close to this. “ADCS continues to call for urgent new legislation which prevents profiteering in children’s services and for the introduction of pricing bands and caps.” Katharine Sacks-Jones, head of the Become charity for children in care and care leavers, also warned that finding the right private provision often meant moving children hundreds of miles. Louise Gittins, chair of the Local Government Association’s children and young people board, said that while a “mixed market” of provision of homes can be positive, she added: “Private equity providers are making extremely high profits and carrying concerning levels of debt that risks the stability of homes for children in care, which is paramount if they are to thrive. We continue to call for oversight of the market.” A DfE spokesperson said: “Profiteering in the children’s homes market is wholly unacceptable. We are working with Ofsted and the sector to develop a new financial oversight regime to increase financial transparency across the sector, and investing £259m to support local authorities to create more placements for children in high-quality and safe homes.”