Aflood of post-pandemic sales led to a buoyant nursery market in 2022, but there is a different picture now with sales ebbing and buyers being more cautious about the settings they acquire as the sector faces a wave of new challenges.
‘We are in a very different place this year in market terms,’ says Courteney Donaldson, managing director of childcare and education sectors at Christie & Co. ‘Last year was an especially monumental year for nursery transactions. After a full year of, dare I say, “normalised” trade following the pandemic, there was a surge of owners contemplating sales and retirement, which fuelled the market.
‘So last year there were lots of opportunities available across the whole marketplace, including a high number of larger high-quality settings and a larger number of regional groups coming to the market than previous years. There was also a lot of medium size settings of 40 to 50 places and a very strong appetite from buyers that fuelled activity.’
According to Christie & Co’s mid-year review in July, there was also a strong start to 2023, with a 20 per cent increase in the number of owners looking to sell their nurseries in the first six months of the year, but that has now reduced. ‘We’re not completing the same volume of nursery sales that we completed last year,’ says Donaldson.
Arun Kanwar, managing partner at Cairneagle, agrees that sales during the first half of this year remained high, with transactions by nursery groups committed to growing through mergers and acquisitions (M&As) – including Kids Planet, Kindred and The Old Station Nursery Group (see box, overleaf) – but cautions that the sector has ‘temporarily slowed down’ due to a variety of well-publicised challenges:
Recruitment: ‘Some would say the sector is being killed by staffing right now,’ Kanwar explains. ‘The challenge of staffing has two impacts – it holds back enrolment where there is demand, or enrolment might be delivered but at the cost of very high agency fees.’
Donaldson says the problems with recruiting and retaining qualified staff are leaving some settings with no option but to limit the numbers of children. ‘They are restricting their capacity because they can’t service the demand,’ she comments. ‘We’ve heard of some nurseries closing rooms because they haven’t got enough qualified staff.’
Helen Wong, senior consultant at Setfords, says while the problem of staff shortages is an issue ‘across the board for nursery operators’, groups are in a better position to manage it because they can re-allocate employees internally.
Inflation: Record inflation has resulted in nursery operating costs significantly rising. Prices of food and non-alcoholic drinks increased by 13.6 per cent in the year to August 2023, according to the Office for National Statistics. While this is considerably down from the recent high of 19.2 per cent in March – the highest rise seen in 45 years – prices are still high and continue to take their toll on nursery businesses, along with rocketing energy prices that are also only now slowly reducing. ‘It’s the first time I’ve heard people saying that the cost of food is becoming a real problem,’ says Kanwar.
The high cost of living is also impacting staff retention, adds Donaldson, with qualified practitioners moving into the school sector or retail because their household bills are increasing and they can earn higher salaries with less responsibility.
Rise in interest rates: Higher interest rates make it more expensive for people to borrow money, which has a number of impacts on the nursery market. Donaldson says the impact of Liz Truss’ short leadership is still being felt on the economy.
‘Those increases have led to the cost of capital being increased, so when buyers are wanting to raise money to expand, it is now costing significantly more than it did last year,’ she explains.
Kanwar agrees. ‘The cost of a lot of acquisitive work in every sector is debt-financed, and debt is a lot more expensive than it was.
‘The reality is that if debt is more expensive then the basic cost of repaying the debt is more expensive and therefore your price has to adjust accordingly, so the prices of nurseries are post-peak.’
Cost of childcare: ‘Then there’s the issue of financial sustainability and people trying to defend themselves by putting up fees. But then you’re in the world of price elasticity of demand and parents who are already dealing with the cost of living issues,’ says Kanwar. ‘Earlier this year there was a lot of publicised challenges around the cost of childcare and it does seem that some parents are choosing informal childcare in the short term.’
RESPONSE TO CHALLENGES
‘There’s an argument that the very, very best businesses could still attract premium prices, but overall pricing has gone down and buyers are being a bit more discerning,’ believes Kanwar.
‘Rising interest rates mean that people are needing to focus more on their portfolios and consolidating and optimising them, and new investors are making sure that the businesses they’re buying are really well positioned. It all links, because if businesses are making less margins now than they were then, they’ll pause investing right now.’
Unfortunately, it is also resulting in nurseries closing when the pressure to maintain surplus margins becomes too great. Donaldson says this is particularly happening in deprived areas.
‘Therefore, buyers are far more mindful about the types of nurseries that they are looking to acquire,’ she says. ‘There is still a wide pool of buyers that spansall portions of the market from first-time buyers to larger groups and the regional groups, but theyare all being more cautious.’
She adds that transactions are taking significantly longer. ‘Due diligence among buyers is taking longer, typically for those buyers that are solely relying on bank funding. Banks are doing more checks around business sustainability, the buyers’ business plan and their expertise because they are mitigating risk.’
Wong says there are advantages of selling to groups because they are ‘cash-rich or have a financial pipeline ready to use to acquirethe target question’. She adds that they also have a two- to three-month turnaround aim, which is usually met.
LOOKING FORWARD
Donaldson says Christie & Co is seeing similar challenges around workforce and inflation across other sectors, including the elderly and social care market. She predicts: ‘For the first time in a long time, our price indices that we will report in January will not evidence as much growth as they have in previous years, and I think that will be the same across a number of sectors that we specialise in.’
Donaldson says a lot will reston the outcome of the pending general election. ‘It’s very evident that childcare is going to be one of the key battlegrounds, which is positive for parents and for the wider economy,’ she says. ‘It will be positive for nurseries only if the additional provision is properly costed and adequately funded.’
But the outlook is not all bleak. Wong says, ‘The nursery market is still fragmented, with a huge gap between single-site operators and the groups. I expect to see more consolidation. Where nursery operators struggle, groups may be able to help; for example, funding, recruitment, marketing.
‘I think the M&A sector will remain very buoyant. Nursery groups are being funded by mainstream banks and private equity so there are plenty of funds to continue the acquisitions trail. There will also be more interest from international groups coming into the UK to acquire day nurseries. Within the UK, I am seeing numerous professionals change careers and enter the nursery market by way of acquisitions.’
She adds, ‘This level of professional services may up standards of nurseries, and as those entrepreneurial groups grow, they may be targeted by the bigger groups who appreciate the groundwork done by such entrepreneurs.’
Kanwar says although acquisitions are slowing, there is still a lot to be positive about. ‘Individual groups may be looking at their financing facilities and focusing on their portfolios, but there are still groups who have the finances to grow and people are looking at coming in, so there is excitement. For example, the German group Kinderzimmer has recently entered the UK.
‘The funding announcement from the Government is seismic and it means that the sector will see good growth in the long term, and there aren’t many sectors that have this type of growth prognosis over the next five to ten years. There are people who are seeing the opportunity to buy in, and the trade-off is getting through the short-term challenges.’
Quest for quality
Kindred, 41 settings (38 nurseries and three after-school clubs)
‘We’ve acquired 16 nurseries in the last 12 months with a mixture of single sites and groups,’ says CEO Ruth Pimentel. ‘The key thing is ensuring the demographics are right – the size of the nursery, the number of working parents and children in the area and how it fits into an existing cluster of nurseries. We see the value of an area manager being able to easily visit the nursery, have a presence and be supportive.
‘Before we even speak to the vendors, we research the site and look at any information we can find such as searching their Ofsted report and daynurseries score. Sometimes one of the team will drive around the area or we use Google maps to check out the quality of the building. We then speak to the vendors about the performance, occupancy, forward projections, and once we’ve made an offer, we will follow a comprehensive commercial and corporate due diligence list, including looking at the legal structures, shareholders, health and safety and any regulatory issues.
‘I love seeing something a bit different about a nursery because it can enhance the whole group, such as drawing on the Montessori principles of a couple of nurseries in our group and acquiring the Bourne Valley group in Wiltshire that has done lots of work on loose parts and respectful care. We are looking for the best because we can learn from them and take it across other settings.
‘Instead of having a separate integrations team, the area manager will welcome them into the group and buddy them up with a nursery manager so they feel a part of Kindred from the start. We then work at their pace to decide all the stuff around being branded Kindred and going onto our systems, because we don’t want to go in aggressively and destroy what is making them successful.’
Kids Planet, 167 nurseries
‘We look for acquisitions that have similar values and focus to us, so we tend to focus on nurseries with 50 places or more that have a good quality track record that we can build on and work with,’ says CEO Clare Roberts. ‘Nearly half of our acquisitions have approached us directly because they know our core values, and they tend to be owners looking to exit the sector due to retirement. We steer away from distress sales because it takes too long to add value. We prefer to complement the high standards that a nursery already has and bring in additional support through our training academy.
‘When judging the quality of a nursery, we look at Ofsted, financial performance and, importantly, staff retention and turnover because our aim is to only operate with our staff team and not use agency colleagues.
‘Every acquisition is different. Sometimes more people know about the acquisition, which makes it easier to ask more open questions, but we need to see how the setting operates and how we can take it forwards. It’s not just about adding value but also learning from the acquisition and the amazing things they do that we can roll out through the business.’
The Old Station Nursery Group, 79 nurseries (owned by La Maison Bleue)
‘We look for nurseries who share our ethos and will fit in well – we are not looking for distressed assets. It takes a lot of work to “turn around” a really poor nursery and we wouldn’t want this to detract from our other nurseries or staff,’ explains chief executive Sarah Steel.
‘We do background work first, like daynurseries and Ofsted scores, then our M&A team will visit and, just before we complete, our ops team will visit, if possible.
‘We also keep up a really close dialogue with the vendor.
‘It is useful to look at the Ofsted history, but as operators we know that the report is just a “moment in time”, so we take it with a pinch of salt. Long-running staffing issues are concerning, but a momentary mistake can just be bad luck. A visit or conversation would help in this case.
‘We look for USPs such as really good quality care with staff who will go the extra mile. A “more is less” approach to interiors with good quality furniture and equipment, not piled high with plastic or domestic toys, and attractive outdoor spaces.
‘To sustain quality, we have a very experienced Quality Team, who always spend time with newly acquired settings. They will help new settings to access the appropriate training, both in-house and external, and will ensure that our standards are upheld. They also feed back ideas that we could adopt and use elsewhere.’