The venture capitalists and the scandal-hit children's homes

Firm that failed a victim of grooming gang was sold at a huge loss just before the end of the trial, but investors insist it was nothing to do with the case

The children's home group at the centre of the Rochdale sex abuse scandal was sold at a massive loss by its private equity owners just days before guilty verdicts were returned in the case, The Independent has learnt.

British-based 3i sold the home and its parent company last month for a "nominal sum" – used in financial circles to indicate a token fee, often £1 – to another private equity-owned children's home company shortly before the conviction of nine Asian men for grooming and sexually abusing teenage girls.

To complete the sale, 3i, one of Britain's largest private equity houses, made a loss of about £20m, but the company insisted the decision to sell was not linked to the Rochdale case or allegations that one of its homes failed to protect its sole resident from abuse.

The victim, who was 15 at the time of the abuse in 2010, was being looked after in a "solo" residential home owned by Green Corns Ltd, a subsidiary of Continuum Care and Education Group which specialises in offering "intense and individual care" for troubled teenagers in single-occupancy children's homes.

The company charged Essex County Council £250,000 a year to look after the teenager. Despite having a staff of six to provide 24-hour care for her, the girl went missing 19 times in three months, for up to two weeks at a time. During these disappearances she had sex with numerous men, often when she was drunk or even asleep.

Last week, the standards watchdog Ofsted carried out a no-notice inspection of the home following allegations that staffing levels did not meet the minimum requirements at the time of abuse. A previous Ofsted inspection had also recommended that staff receive training in prevention of sexual exploitation.

The care sector has proved an attractive investment option for private equity firms in recent years – with mixed results – because of the large amount of property that can be converted into sale-lease arrangements and the guaranteed income from local authorities.

Children's charities have expressed concern that the for-profit impetus of private equity, which works on a five-year model of adding value to a business by acquisitions and efficiencies before selling on, does not fit providing care for the vulnerable in society.

The Independent has learnt from City sources that 3i made a loss of about £20m when it sold Continuum, which had grown into one of Britain's largest specialist care providers, on 26 April to Stockport-based Advanced Childcare Ltd.

3i and other investors paid £26m in 2004 for Green Corns, which at the time had 30 homes in north-west England and employed 170 staff. Plans were announced to roll out the company's business model across the UK and double the number of homes in three years.

The investment house, which like other private equity companies would expect to sell its best-performing assets within a five-year time frame, yesterday said its decision to sell Continuum after eight years was not influenced by the criticism of Green Corns emerging from the Rochdale scandal.

A spokeswoman said: "It is absolutely not the case that the decision to sell was influenced by the Rochdale case. There is no link between the two."

The decision to sell the business is likely to have been taken before evidence was heard in Liverpool Crown Court concerning the care received by the teenage girl, who wrote two notes to staff asking to be moved, the second of which said: "Asians pick me up. They get me drunk, they give me drugs, they have sex with me and tell me not to tell anyone. I want to move."

This second note was passed to police and prompted the police investigation. The girl, whose history of vulnerability to sexual exploitation was recorded on her notes prior to arriving Rochdale, was later moved.

Some children's groups have raised concerns about the presence of private equity-owned companies in such a complex sector as residential care.

Enver Solomon, policy director at the Children's Society, said: "Some of those running these homes are private companies who are ultimately about making profit. The question is whether the providers of these care homes have the best interest of the child at the heart of their operation."

Kevin Williams, chief executive of The Adolescent and Children's Trust, said: "It is perfectly feasible for private investment in the care sector to work where it is done to provide a good-quality service with a reasonable return. In those cases, it is to be welcomed. But the problem comes where it becomes about maximising profit. "One of the ways of maximising profit is to reduce levels of support and increase the workload on staff."

Despite its concerns about staffing levels and recommendations for training, Ofsted found in February 2010 – at the height of the sexual abuse of the teenager – that staff at the Green Corns home, one of 18 solo homes run by the company in Rochdale, did "act appropriately to protect young people from harm". 3i, which has also previously invested in care provision for adults with learning disabilities and nursing homes, said it had worked to ensure that Green Corns met all requirements of regulators during its period of ownership and supports reviews into provision for "looked after" children following the Rochdale case.

The spokeswoman said: "From the enquiries we have been able to make into the matter, we believe that Green Corns complied with all relevant protocols, procedures and guidance and liaised properly with other agencies throughout its handling of this matter."

With 70 per cent of residential care places provided by private companies, it is clear that large-scale corporate investors, including foreign pension funds, will remain in the sector for some time to come. Advanced Childcare, which following the acquisition of Continuum is now Britain's largest provider of specialist children's care and education with revenues in excess of £50m, is owned by London and California-based private equity company GI Partners and is well-regarded in the sector.

The Children's minister, Tim Loughton, who is under pressure to clear up the chaotic supervision system which has seen some homes fail to keep tabs on the children in their care, last week asked Ofsted to use "all its enforcement powers" on failing homes, which include an ultimate sanction of closure.

Green Corns said the company was "pleased" that the criminal justice system had been brought to bear on the Rochdale abuse ring. In a statement, it said: "The company continues to work in close partnership with a range of statutory and voluntary agencies to safeguard and protect the welfare of all our young people." Andrew Dean, Advanced Childcare's chief operating officer, said: "We are mindful of the recent criminal case and circumstances surrounding it, including the care provided by the home in question. Advanced Childcare is currently undertaking a full review of policies, procedures and systems to re-affirm the safety of children and young people, with their safety remaining of paramount importance."

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