Christie & Co’s Business Outlook 2019 report predicted the childcare market would become increasingly divergent with more closures and distress but equally high demand and strong performances for high quality settings. In the education market, Christie & Co highlighted an expected increase in independent school closures, particularly those outside of London and the South East, while in the specialist childcare market, foster care businesses were predicted to attract premium prices and demand will continue to exceed supply for residential homes.
Children’s day care
Whilst Christie & Co has seen some distressed assets come to the market this year, as predicted, with some of the smaller settings succumbing the effect of the 30 hours of free childcare provision, demand for high quality, single site settings and small groups has continued to outstrip supply, maintaining the premium prices for the highest quality businesses, as seen last year.
While the sector continues to be buoyant, Christie & Co anticipates that multiples may potentially be reaching a ceiling as buyers are less inclined to see prices rise, however the buyer pool continues to be incredibly strong. This includes first time buyers, consolidation from small and regional operators, and nationwide growth from the corporate operators and investors, alongside continued International interest as highlighted by Christie & Co in Business Outlook 2019.
Buyer types in transactions completed by Christie & Co in the last 12 months and 6 months show little change over the period, with first time buyers making up almost half and corporates comprising a third, showing the wide range in buyer pool.
Also previously noted by Christie & Co, 2019 has seen increased interest amongst traditional care home developers looking at the benefits and potential of co-locating care homes with nursery provision on site too. Increasingly this year we have seen evidence of developers and investors giving due consideration to the prospect and opportunity that could be presented in the event of care developments incorporating early years provision.
Christie & Co will provide further insight into the day nursery sector with its upcoming research report due to be published in September 2019.
As a highly fragmented market, demand for independent schools remains high compared to supply, with competition for good quality settings with high EBITDAs fierce, from both domestic and international purchasers. Christie & Co predicted more distressed businesses in 2019 and whilst there have been signs of this in the first half of the year, it is anticipated that closures will occur towards year end, perhaps even seeing fire sales hit.
The Teachers’ Pension Scheme contribution rate increase from 16.48% to 23.6%, in effect from September 2019, is anticipated by Christie & Co to be a further and potentially final blow for many education businesses already struggling with sustainability, much like the 30 hours funding was a final straw for nursery provisions.
Private equity groups and smaller education providers such as Synova Capital, China First Capital Group, Dukes Education, Oxford International Education Group, GEMS Education, Bellevue Education Group, and Inspired Learning Group illustrate the wide pool of eager purchasers that continue to grow via selective investments and acquisitions.
Christie & Co’s specialist childcare team have been increasingly active across the residential children’s home, specialist school and foster care business sectors. Overall, so far this year, the trends in children’s residential care and foster care sectors were as predicted, with an increase in local authority referrals towards residential settings being seen. Notably buyers are increasingly being drawn to businesses which offer quality therapeutic and high acuity care, further fuelling demand from providers seeking vacant premises suitable for business expansion and existing business acquisition opportunities. Notable 2019 transactions include Waterland Private Equity’s investment in Sandcastle Care.
Christie & Co anticipates increased activity in the specialist childcare businesses sectors during the second half of 2019 and anticipate that some notable nationwide transactions will fuel buyer demand and premiums.
While no overt impacts of Brexit have been seen in the UK childcare market, Christie & Co identifies that the first half of the year has seen a slowdown in the speed of some transactions, which they attribute to additional caution and due diligence being undertaken by buyers.
Continuing on from 2018, international interest has not been impeded by Brexit, as Christie & Co notes appetite from overseas growing, notably from China, the Far East and Europe, for high calibre businesses, with sting management teams and proven earnings.
This has been exemplified recently in the education market with Bright Scholar Education, the largest operator of international and bilingual K-12 schools in China, acquiring two independent schools; St Michael’s in Llanelli, Wales, and Bosworth Independent College in Northampton. Both assets are highly ranked, reputable schools with long histories for delivering quality education, having been established in 1923 and 1977 respectively.
Courteney Donaldson, Managing Director – Childcare & Education comments, “While the volume of transactions across the UK childcare and education sectors, so far this year, has been marginally lower in comparison to the same prior year period, as we reported in January, 2018 saw unprecedented levels of both deals activity and pricing premiums, with numerous notable portfolios being last year.
“During the first six months of 2019, while deal volumes have stabilised, the premiums achieved for the most desirable businesses have continued to rise. Demand across the market for businesses of all sizes remains incredibly strong, and indeed the primary trend of 2019 thus far is that demand from buyers is exceeding supply.”
For more information on our Childcare & Education team and recent activity, click here