Childcare - are nurseries becoming Private Equity's playground?

The UK has long represented the global gold standard for early-years childcare. The overall market is worth nearly £4.0bn and has been growing at over 5.0% per year since as far back as 2008. The nation's shifting demographics have long been kind to the sector, with ever-increasing demand for spaces driven by a combination of birth rates as high as they have been since 1990, shifting attitudes towards working parents and net immigration from overseas in the 20 to 40 age bracket. More recently, April's changes to the delivery of childcare benefits from a voucher-based to a tax break system have increased the effectiveness of financial support to a wider range of eligible parents.

It is no surprise that the sector continues to attract private equity interest - positive underlying structural dynamics, barriers to entry through regulation and what remains a highly fragmented marketplace with buy-and-build opportunities and tangible economies of scale represent the textbook hallmarks of an investment-friendly environment. In recent years Phoenix Equity, Epiris, Livingbridge and Foresight have invested in Just Childcare, Treetops Nurseries, Happy Days and Poppy & Jacks respectively, and all four transactions included committed growth funding for further organic and acquisition-led growth. Epiris' successful £93m exit from Treetops Nurseries to Ontario Teachers Pension Plan-backed Busy Bees in March represents one of the largest single deals in the sector in recent years.

Further still the cash generative and often freehold-backed nature of nursery chains means that for those operations with ambitious growth plans, the emerging alternative lender market is a real strategic option for growth funding. In February 2017, OakNorth Bank set the precedent, providing an £8.0m acquisition facility to ICP Nurseries to support their roll-up strategy.

Nonetheless the private equity world has not had things all its own way. Two of the three largest recent acquisitions have involved international strategic acquirers, with France-based LPCR's acquisition of Magic Nursery representing the first European foray into the UK market, and US-listed Bright Horizon's huge £166m acquisition of Asquith Nurseries capitalising on weak sterling and proving that Brexit has not deterred cross-border acquisitions. Strategic competition for the best assets has helped to underpin strong exit multiples for attractive targets. Domestic players are also looking outwards for growth opportunities, with the Department of International Trade encouraging UK nurseries to export their expertise to Asia, the UAE and China.

That is not to say that the sector is not without its challenges, with imminent cost pressures making scale of even greater importance. Top of the agenda is the Government's commitment to providing 30 hours of free childcare for households earning less than £100k per year, up from the current 15 hours. Whilst this would have been seen as a positive move for the sector, the proposal is stirring a mixed reaction and has already prompted closures due to the uneconomical proposed funding rates. Staff costs are also coming under pressure from the rise of the National Living Wage to £9 per hour by 2020, and from the introduction of the Apprenticeship Levy, although the sector has always been one characterised by high spend on apprenticeships.

Nonetheless, the UK's position as global leader is unshakeable and 2017's early years M&A environment is showing few signs of letting up and looks set fair for the foreseeable future. For owner managers looking to capitalise on the success of their business, the market has never been stronger.

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