Private equity firms buying up small agencies have “set off alarm bells” within England’s foster care system, the Local Government Association says.
Three groups account for 45% of funds spent on independent fostering by English councils, according to new analysis.
The LGA said councils worry about what could happen if one group failed.
The Nationwide Association of Fostering Providers said its members provided a vital and high quality service.
More than 75,000 children are in care in England, compared with about 60,000 a decade ago. Most of these children are in foster care.
Councils manage foster placements themselves as well as commissioning care from independent fostering agencies.
Many of these providers started as local, small-scale operations but private equity firms – essentially, investment companies – have moved into the sector in recent years.
The National Fostering Agency, Compass Fostering and Foster Care Associates are now the dominant independent groups in the industry.
All three run for profit and are backed by private equity.
Andrew Rome, a specialist accountant, said these firms’ business models involve buying up agencies, consolidating them, and selling the companies on.
Mr Rome, who analysed the finances of these providers for a recent government-backed review led by Sir Martin Narey, said their rate of return was “something like two or three times the original investment amount”.
He estimated the three groups now account for more than £300m of annual spending by local authorities in England – “at least” 45% of spending.
David Simmonds, deputy chairman of the LGA, said councils would worry about what the consequences would be if one of the groups failed.
“A number of companies have gone out of business in the social care sector, care home providers principally because they’ve gone down this path of consolidation and ever increasing profit and its led to trouble,” he said.
“Local authorities will be looking at recruitment and retention of our own in-house foster carers to make sure that we’re prepared to deal with that situation effectively and efficiently,” Mr Simmonds said.
Local authorities are also concerned there would be little competition and the groups could raise prices.
Many councils said they already struggle to meet the costs of independent foster care, which they said were far higher than their in-house provision.
Linda began working as a foster parent in Liverpool in 2005 through a small private agency, and has cared for nine children.
The number of children in care in Liverpool has risen from 860 to 1,365 in a decade.
Linda said the agency originally had a “family feel” but when it was sold, and sold again, it became less “child-centred” and more focused “on money”.
She left the agency four years ago and said she feels happier working directly for the council.
However, independent agencies tend to recruit foster carers more easily than local councils – offering bigger carer allowances and sometimes better support.
Liverpool City Council now offers to match what private agencies pay to try to draw foster carers away from the private sector.
Councillor Barry Kushner, the council’s cabinet member for children and social care, said bringing the foster carers “in house” could save millions of pounds per year.
He was concerned the concentration of fostering in so few agencies could mean the council has less control over where children are placed.
If children were sent to foster carers outside of Liverpool, they would have to move away from their schools, family and friends.
There is fierce argument over the cost of independent agencies relative to in-house foster care.
While the LGA says it is far more expensive, the conclusion of Sir Martin Narey’s review last year was the gap was “very small” once all overheads were taken into account.
It said independent agencies cared for the more “challenging” children and had to invest more in pay and support for carers.
The National Association of Fostering Providers said they played a vital part in supporting vulnerable children, and that local authorities were unable to keep up with demand.
They said their services had been consistently rated high quality by Ofsted.
But Andy Elvin, chief executive of the UK foster charity, TACT, said there was a lack of transparency in the independent sector.
He said although it often offered better training and support than local authorities, he was concerned about the dominance and high profits of private firms.
“It can be absolutely impossible to follow the money. The agencies are owned by one company which is owned by another… which ends up offshore,” he said.