Private equity groups profit in UK nurseries | Daily News Byte

Private equity groups profit in UK nurseries

 | Daily News Byte

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Nestled among high-end estate agents and bakeries in Highgate, N Family Club is fast becoming one of North London’s most sought-after daytime spots. Members enjoy three meals a day, a dedicated creative space, landscaped gardens and tasteful Scandinavian interiors. And they are all under 5 years of age.

Backed by private equity investors Gresham House and the Stan Group, N Family Club is now one of the biggest childcare providers in the UK, according to sector experts Nursery World. With ambitions to grow to 80 outlets by 2025, it is one of a number of fast-growing chains reshaping England’s fragmented and financially precarious early years sector.

N’s growth comes amid a childcare crisis. Thin government subsidies have left an unorganized market of providers struggling to stay afloat, staff wages low and parents facing the highest childcare fees in Europe.

Yet large for-profit groups and private equity backers have spied an opportunity, ramping up acquisitions and increasing their stake in a sector traditionally dominated by smaller chains. Investors say this will bring more cash, innovation and efficiency.

But some owners, parents and staff fear that handing over childcare to international, often high-profit companies, will drive up costs, hurt quality and leave nurseries in disadvantaged areas in a precarious financial position.

“The most troubling aspect of this is the fact that we don’t have a managed market,” said Sam Friedman, a former adviser to the Department of Education and co-author of a recent paper on child care by the think-tank Institute for Public Policy Research. . He fears that expanded private ownership will divert funds to profits and debt servicing.

“We are putting a lot of state money into the sector and they are taking a lot of money,” he said.

Nursery bar chart for children under two years

Acquisitions in the nursery sector have increased over the past five years despite the UK’s economic turmoil. According to Christie & Company, a brokerage firm, the nursery business grew by 50 percent in the first half of this year.

The largest chains, Bright Horizons and Busy Bees, have each expanded to more than 300 nurseries, becoming the largest providers in the country. Newer private-equity-backed chains, such as An Family Club, Family First and Kids Planet, have nearly doubled in the past year to 142 settings, though their total market share is still small out of a nationwide total of 27,000.

The scale of opportunity is significant. The 20 largest nursery companies have increased their capacity by 37 percent since 2016, but still account for only 15 percent of the total market, said Arun Kanwar, consultant at consultancy Cairneagle. Half of all nurseries are standalone “mom and pop” outlets.

Some private equity groups are deploying ‘roll up’ strategies, in which buyout groups take small independent businesses, usually using debt, and pull them together into an industry with economies of scale. They hope they can eventually sell to the enlarged group at a higher overall valuation.

Kanwar believes that consolidation will improve quality, as larger groups save on overhead costs, share resources and attract investment. “The UK has some of the best childcare in the world and arguably wouldn’t have got there without innovation and private sector investment,” he said.

For others in the sector, however, the role of private equity in the consolidation of the sector requires closer scrutiny. A UCL report this year warned that the nursery sector is at risk of being “damaged” by large groups that “don’t necessarily” build new locations or reinvest more money, adding that high debt levels put providers “at risk of collapse”. puts

Cheryl Headland, founder of Tops Day Nurseries, which runs around 30 sites in south west England, said investors contact her “a couple of times a month”. But she has always ruled out sales, because investment comes with the obligation to pay high levels of interest on debt – money that could be spent on staff or equipment.

“These expensive fees mean that already very slim profit margins are eroded, so you can’t invest in staff or maintenance,” she said. “They are demoralizing the sector.”

Busy Bees Nursery Group has passed between private equity and corporate owners for more than two decades. Now owned by the private equity arm of the Ontario Teachers’ Pension Plan, its debt is about 7.5 times its earnings, Moody’s said in a report last month. The rating agency classified the debt as B3 – “subject to speculative and high credit risk”.

Busy Bees said its leverage, calculated using various metrics, was 4.1 times earnings.

The debts left the group, which had headline earnings of £178mn in 2021, with a £29mn bill for interest payments on bank loans and overdrafts.

Busy Bees said it was in a “strong financial position”, with a “comprehensive hedging strategy” that protected it against rising interest rates. Since OTPP bought the chain in 2014 the proportion of nurseries deemed “outstanding” by Ofsted has increased from 19 to 35 per cent of school inspectors.

“The scale and quality of our services has been further enhanced by the significant investment of expertise and capital by OTPP,” it states.

Providers like Busy Bees operate in what Josh Hillman, director of education at the Nuffield Foundation, calls “a quasi-market using public resources.” A patchwork of voluntary and private sector providers receive some government support through funded hours for three and four-year-olds. But this does not cover the true cost of the place, so nurseries rely on some parents paying more for “extras” such as small children, extra hours or lunch.

The problem, Hillman said, is in areas where families can’t afford these add-ons. While some voluntary providers support disadvantaged nurseries with income from affluent areas, a market dominated by for-profit groups is less likely to deliver to places where there is need but no money. “Private equity does not help divert provision to more disadvantaged children,” Hillman pointed out. “There’s no reason to do that.”

An Family Club targets more affluent parents, and only 5 percent of its revenue now comes from government subsidies, said Peter Bachmann, managing director of sustainable investment at Gresham House. However, the group aims to increase this proportion while focusing on building new nurseries.

The group’s most recent accounts show it has spent £1.8mn in finance costs and interest – equivalent to around a fifth of its £10mn wage bill – and it has recently taken on new debt, including a loan with an interest rate of 10 per cent. Bachmann said this was to fund the acquisition and that En’s debt levels were “conservative”. The group has also launched a bursary scheme to offer fully funded places for children most in need through local authorities.

Kanwar believes that a wide range of childcare providers will meet the diverse demands of the market — and the private sector should be commended for bringing in investment where the government has not.

But others remain skeptical. As private equity’s share of the market grows, Friedman believes there is limited time to pursue other options before large providers become embedded in the system.

“It looks like this is the moment where if we don’t act now, it’s going to deteriorate,” he said. “We’d be better off doing that integration by the state.”

Additional reporting by Kaye Wiggins

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