An investigation into the UK’s politically sensitive children’s care sector has prompted the private equity sponsor of the country’s largest for-profit provider to put on ice a £1 billion sale of the business, EducationInvestor Global can reveal.

This publication has learnt that Stirling Square Capital Partners, owner of Outcomes First Group (OFG), has shelved plans for a sale of the business that was due to launch in April or May.

As revealed exclusively by EducationInvestor Global in March, Stirling Square hired JP Morgan and Moelis to run an auction of OFG, which investment bankers expected to fetch in the region of £1 billion. If this enterprise value was achieved, it would represent one of the largest-ever transactions in the UK’s special educational needs (SEN) market.

However, sources told this publication, on the condition of anonymity, that Stirling Square is awaiting the outcome of an investigation by the Competition and Markets Authority into the children’s care sector before bringing OFG to market.

OFG encompasses the National Fostering Agency (NFA), as well as Acorn Care & Education and Hillcrest & Options Autism. The SEN and children’s care conglomerate operates more than 35 schools, 77 residential homes and 28 fostering agencies across the UK, which collectively generate earnings before interest, tax, depreciation and amortisation (EBITDA) of £80-90 million, sources said.

The children’s social care sector has drawn intense political scrutiny in recent years as the role of the private sector has expanded. Profit-seeking providers, backed by private equity, have come under fire for the rates they charge local authorities to place children in care and educate pupils with SEN. Josh MacAlister, chair of a government review of children’s social care, has said that the market for placements was broken and called on private providers to cut their “indefensible” profits and fees.

Corporate finance and legal sources said that Stirling Square was concerned about the potential ramifications of the CMA’s review, which is due to report later this year, and has consequently delayed the sale of OFG.

“The process is on hold until the conclusion and outcomes of the CMA review have been published and assessed for their impact,” a source who has advised on deals in the children’s care sector said.

Despite the CMA’s inquiry, other private equity houses are pushing ahead with sales of SEN and children’s care assets.

This week, the Financial Times reported that Charme Capital Partners is exploring a sale of Witherslack Group, which employs 1,800 staff running 25 homes and schools for children with SEN, after four years of ownership. PwC is said to be advising on the sale, the value of which is touted in the region of £600 million, the FT’s report stated.

Outcomes First Group was acquired by the NFA from Sovereign Capital Partners in August 2019 for around £250 million. Following the NFA’s takeover of Outcomes First Group, Stirling Square opted to drop the former’s branding in favour of the latter. As a result, Outcomes First Group became the dominant business.

The holding company for the combined entity – SSCP Spring Midco 2 – booked turnover of £265 million and gross profit of £116 million in the year ended 31 August 2019, financial statements filed with Companies House show. During that period, the business recorded a loss of £58.3 million and refinanced bank loans worth £510 million, which come due in 2025.

The organisation – which also straddles the healthcare sector because it operates residential children’s homes – is funded in part by taxpayers. Councils also often cover the fees of students enrolled at for-profit SEN schools.

Stirling Square had not responded to a request for comment at the time of publication. A managing director at Moelis did not respond to an email from this publication. JP Morgan could not be reached for comment at the time of publication.

Date published: 1 July 2021

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