Childcare & Education
Our team is renowned across the day nursery and education sector as the ‘go to’ advisers, providing services to the whole early years market and looking after childcare business lifecycles, from conception to exit.
Demand for high-quality formal childcare remains strong as working parents rely on childcare delivered by day nurseries, with associated costs considered a necessity. While some private settings have ‘opted out’ of providing eligible parents access to 30 hours of childcare, the majority of nurseries in England have ‘opted in’.
The importance and stability of the sector continues to attract liquidity from a range of investors and banks, keen to support business owners with their expansion and acquisition plans.
The UK market itself remains very fragmented. Around 80% of private day nurseries are owned by individual operators, with many owning single settings. The rest are small to medium sized groups, comprising of three or more nurseries. The largest groups – Bright Horizons and Busy Bees – collectively operate with c. 65,000 places, provided across some 600 UK settings.
The day nursery business model is one which is broadly similar across the world, with key variants being each country’s respective political, regulatory and economic landscape. Opportunities, including acquisition platforms and organic growth prospects, across the UK, Europe and Asia are becoming increasingly attractive to international investors and international trade parties alike, keen to buy, develop and expand businesses with the backing of strong local management teams and the development of local partnerships.
Typically, initial investments, be that a platform purchase or partnership, will objectively seek to allocate a five to eight-year window during which they will seek to grow, mature, consolidate and then sell the business.
At the start of 2017, we saw the first major inbound investment in M&A activity from an overseas provider for almost two decades when Magic Nurseries, with 16 children’s day nurseries, was sold to Les Petits Chaperons Rouges, a leading private nursery chain in France. The Magic portfolio, comprising a largely freehold estate with 1,076 places, was sold amid much competitive tension from a large, and wide-ranging pool of prospective buyers. The successful purchasers swiftly went on to acquire a further 20 nurseries in September and now have more than 3,000 places – ranking them as a top 10 UK provider – a position secured in less than 12 months following their initial UK entry acquisition.
The UK has become increasingly attractive to foreign investors because of currency gains against the Pound following the Brexit referendum. Alongside inbound investment we are also seeing a substantial rise in outbound investment, with demographic trends and regulatory changes in countries such as China fuelling the interest and sowing the potential seed of opportunity for European, American and UK based providers.
Following the revocation of China’s one-child policy, there has been growing demand from aspirational parents seeking premium early years bi-lingual education. Teamed with a shortage of childcare facilities, and a desire for ‘western education’, opportunities are abundant for innovative providers.
There is plenty of innovation across the nursery sector, all of which will contribute to shaping the landscape of the sector in the following years. Co-locating, where nursery settings partner with care homes, a well-established concept in the US, is a trend that is on the rise and offers many benefits, including social and commercial. At present only a small number of nurseries are physically colocated with a care home – although the model already operates very successfully in other countries, such as the USA, Japan and Singapore, Canada and Australia, as well as in parts of Europe.
Over the past year, we have also seen a real growth in Forest Schools, which are nurseries with virtually no premises, set in areas of woodland. Generating demand and much interest from parents, investors too are increasingly interested in this model because of the relatively low infrastructure cost and premium fees achieved. There is a similar interest in Beach Schools for nursery settings located in proximity to our UK coastline.
Vertical integration is also on the rise, where classes comprise mixed age groups. Common in parts of Europe, children learn from, play with, and support each other, as they would do with siblings of differing ages in a home environment.
As with the early years sector, overseas interest in the UK education market has heightened, with an increasing number of both proprietors and investors seeking platform acquisitions, portfolio growth or partnership arrangements. British education continues to be highly regarded and sought after across the globe, and with brand positioning and reputation being a fundamental key to performance and longevity, acquirers are keen to target established, successful schools.
There remains a very high level of demand from prospective purchasers for both world-renowned and provincial schools that demonstrate a solid academic and trading performance. As always, the key to their requirements is having a clear line of sight over revenues and expenditure. There has long been a two-tier market across the UK independent school sector and this void between premier and provincial certainly widened last year.
From the start of the year, we witnessed an increase in banks seeking our advice due to schools running into financial difficulties, notably due to declining pupil numbers and increased pressures on operating costs. When moving into a period of distress, bankers and investors ordinarily do everything in their power to ensure that the business can keep trading. However, with demographic and financial pressures differing across each region of the UK, there are unfortunately an increasing number of cases where sustainability is challenged.
While being mindful of some of the domestic challenges, education has now become a sizeable global business and, similarly to the nursery sector, we have seen an influx of overseas investors seeking to acquire prestigious schools or enter into management or franchise agreements with some of the most notable schools in the UK.
As the demand and competition for these opportunities grow, we expect an increase in levels of activity and prices achieved.
During 2017 the sector was not without its challenges, however, the outlook for 2018 appears positive. Across the UK, with some 460 schools, 82 colleges catering for some c. 15,000 pupils, demand from buyers for high yielding schools catering for all acuity levels remains high.
In 2017, we saw increasing demand for schools that offer boarding provision, notably due to the levels of fees that can be achieved which on average are c. £120,000 per annum compared to an average of c. £40,000 for day students. The specialist childcare market has seen equal levels of demand with operators of children’s homes, foster care agencies and SEN schools looking to establish larger and more diverse portfolios. Geography generally proves to be less of a barrier to acquisition due to nationwide demand and operators with funds have a relatively high degree of flexibility.
The sector continues to face challenges this year in relation to staff recruitment and retention, the National Living Wage and sleep-in pay, along with fee pressures from local authorities. However, experienced providers are becoming adept at ensuring these challenges are appropriately managed, as the quest for quality continues. Following on from the recession now almost over a decade ago, at which time we saw a decline in residential children’s homes and a rise in foster care, both sectors do remain highly fragmented and we anticipate further consolidation during the year ahead.
With independent foster agencies achieving premium fees compared to local authority foster placements, demand from buyers is set to continue and this was very much evidenced by the degree of interest that we achieved in the sale of Moments Fostering Ltd.
For nurseries, one issue we feel will come to the fore in 2018 is around ratios. At present, pre-school class ratios primarily operate on a ratio of one adult to every eight children, or thirteen children if led by a teacher. Five years ago, the Government was forced into a U-turn when it tried to relax the ratios for children under three years of age, while citing ratios for children aged 3+ years in France of one to 26. Despite this, we are convinced there will be a renewed push to raise the ratios this year.
Sustainability challenges for some schools aside, the outlook for the independent education sector remains very positive and for 2018 domestic growth will feature high on the agenda.
If you're a buyer or investor, keen to learn more about the sector, including changing and emerging trends, comparable deal evidence, USPs and the impact of potential policy introductions on business operations, or if you are contemplating the possible sale of your childcare or education business, please contact our specialist team.